US fiscal cliffs and raging daily infections could unsettle markets in coming weeks
Despite spurts of market excitement over promising sneak peaks in initial test results of Covid-19 vaccines currently in the works, US stock market indices have continued with their holding pattern for now. Interestingly, VIX or the fear gauge seems to have finally closed below its 200 day moving average which it has been bouncing on since June while cash parked in US money market funds which peaked at $4.8trn in late May remains on a gradual downtrend, falling below $4.6trn for the first time since April. By these measures, there doesn’t seem to be much anxiety building up ahead of some major virus-related relief programs which are due to expire this month like the $600 weekly federal unemployment insurance as well as the eviction moratorium for federally insured multifamily homes.
Nevertheless, with the Republican controlled US senate opposing many of the relief bills worth $3.5trn which are already approved by the House, extending these relief programs is look increasingly tricky as we fast approach these fiscal cliffs which could yet unsettle the markets. Moreover, the proposal by the White House in demanding a payroll tax cut to be included in any relief program before the summer recess in early August has been met with even more bipartisan opposition.
With daily rate of Covid infections in the US hitting record levels and having surpassed 70,000 while daily death rates are surging again in many hot spot states, news on the ground is certainly not encouraging for the near term. Moreover, with US testing capacities once again stretched and lead times for testing results having reportedly surpassed their useful one week timeline, medical experts on the front line are sounding increasingly despondent about containing the contagion. This is especially so as no vaccine will likely to be ready in time for the possibility for a second and potentially deadlier infection wave arriving in autumn.
With Trump on the ropes, geopolitical risks remain elevated
As we have underlined over the past few weeks, we fear that with the US president’s overall disapproval ratings rising fast, risks of US policy missteps could be on the rise. The latest polls suggest that Mr Trump’s standing with voters is weakening even further with markets starting to calmly digest the growing likelihood of his defeat in the presidential election in November. The US administration’s latest attempt to try to blame the rising infection rates on CDC and Dr. Fauci for mistakes made in early days of the pandemic have been met with strong scepticism within the scientific community and have led to warnings by senior Republican law makers not to pursue this potentially self-defeating strategy.
Its attempts to divert public attention to other issues, namely punishing China are also proving increasingly ineffective as the nation looks to have generally lost interest, increasingly focused on domestic issues namely the economy, public health concerns and growing calls for social justice. We suspect the potential for more trade conflicts with China also looks to be largely discounted by markets and unlikely to be a factor in any notable market sell-off. Indeed, beyond something bigger like a military conflict in South China Seas, or a missile attack by North Korea (whose government might want Trump to stay in power), it is difficult to see how the current concerns regarding domestic issues in the US can be engulfed by any external factors. Nevertheless, it is far too early to assume these exogenous shocks are out of the picture as we head towards November.
We suggest remaining long technology names as a defensive strategy
As with much of this year, we retain our suggested overweight stance in technology names in Japan, particularly semiconductor-related plays where we see only better visibility ahead. Last week provided more positive news for the segment with generally bullish outlook by industry leaders, ASML and TSMC, with the latter surprising the market by raising its capex projections despite concerns about the US ban on sales to Huawei. Indeed, with China kicking off its phase 2 of its National Integrated Circuit Industry Investment Fund worth nearly $30bn, we have argued that the Huawei ban is actually leading to more aggressive spending plans by Chinese chip makers which are benefiting key material and manufacturing equipment suppliers. With 5G mobile handsets sales in China now leading regional shipments and accounting for a whopping 60% plus of total sales, we see even smartphone sales which have been weak for much of this year to be rebounding in the months ahead while fast growing global digital economy continues to lead to strong expansion plans of cloud infrastructure.
We are also eagerly awaiting the passage of two major US bills proposed in June by the summer recess which we think could trigger a big capex announcement by the likes of Intel and Micron. The first bill, called ‘Creating Helpful Incentives to Produce Semiconductors (CHIPS) for America Act’ would provide 40% investment tax credit through 2024, which would then be scaled down in later years and finally phased out in 2027. CHIPS would also provide a $10 billion program that matches state and local incentives offered to chip makers to build new fabs and would establish an advanced packaging institute. The second bill, the American Foundries Act (AFA) of 2020 provides $15 billion in grants to aid in construction, expansion, or modernisation of fabrication, assembly, test, advanced packaging, as well as advanced research and development facilities. Another $5 billion in grants will go towards funding the construction of one or more secure production facilities. Also, $5 billion in grants would go towards R&D for government institutions.